The Nine Factor Business Test Has Never Been More Important

Effective January 1, 2018, hobbies that make a little money are a tax nightmare.

In the past, if you had a loss from your hobbies, you couldn’t take a deduction. That hasn’t changed. Here’s what has changed.

If you made a little bit of money from your hobby, maybe selling some craft item you made or winning a prize for a competition, it didn’t matter tax-wise because your expenses way outweighed the slight income you’d make.

That all changed effective 1/1/2018 when hobby expenses were no longer allowed to be deducted.

That means if you spend $2,000 on your knitting hobby and sell a crocheted shawl for $100, it’s 100% taxable. No deductions.

The solution is to become a business! You don’t want a hobby. You want a business. Here’s a test I developed years ago, in line with the IRS guidelines, to help you determine if you have a business.

The IRS Nine Steps to Business Quiz

Are you operating a business or a hobby? Take this quick test to find out!

Instructions:

Line one Fill in the name of your company.

Line two Fill in the type of business your company does.

Questions Answer the questions with yes or no. Each no answer weakens your position as a business.

Factor One: Businesslike Manner

Do you have a separate bank account for your business?

Yes ☐ No ☐

Do you (or your CPA or bookkeeper) keep accounting records for your business?

Yes ☐ No ☐

Do you keep copies of receipts in a filing system?

Yes ☐ No ☐

Do you make an effort to collect accounts receivable?

Yes ☐ No ☐

Do you review profit and loss statements regularly?

Yes ☐ No ☐

Factor Two: Time and Effort

Do you keep track of time spent in your business activity?

Yes ☐ No ☐

Do you keep track of business appointments in a schedule or diary?

Yes ☐ No ☐

Do you have notes of conversations you have had with consultants or experts to enhance your business?

Yes ☐ No ☐

Do you keep evidence from business seminars that you have attended?

Yes ☐ No ☐

Factor Three: Dependence on Income

Do you need the income from your business for your lifestyle?

Yes ☐ No ☐

Do you intend to replace your current job with this business?

Yes ☐ No ☐

Factor Four: Reasonable Losses

If you have losses, do you have documentation that:

They are normal for the type of business you are in at the beginning?

Yes ☐ No ☐

Shows that other similar businesses have experienced the same type of downturn?

Yes ☐ No ☐

Factor Five: Effort to Make Money

If you have losses, do you have evidence that:

You have made changes to try and improve your business?

Yes ☐ No ☐

You have investigated ways to make your business more profitable?

Yes ☐ No ☐

You have consulted with experienced business owners or other advisors regarding your business?

Yes ☐ No ☐

Factor Six: Experienced Advisors

Have you identified the advisors you need for your business?

Yes ☐ No ☐

Do your advisors have the business experience needed to give you good advice?

Yes ☐ No ☐

Factor Seven: Your Experience

Have you been successful in this type of business before?

Yes ☐ No ☐

Have you been successful in a similar business?

Yes ☐ No ☐

Factor Eight: Past Profit

Has your business been profitable in previous years?

Yes ☐ No ☐

If your business has been profitable, has the profit been enough to make a reasonable decision to continue your business?

Yes ☐ No ☐

Factor Nine: Asset Appreciation

Is your business building assets that will have future appreciation?

Yes ☐ No ☐

Scoring the Test

For each of the nine sections above, rate how strong your case is as to business purpose on a scale of 1 to 5, with 5 being the strongest.

Businesslike manner

1

2

3

4

5

Time and effort

1

2

3

4

5

Dependence on income

1

2

3

4

5

Reasonable losses

1

2

3

4

5

Effort to make money

1

2

3

4

5

Experienced advisors

1

2

3

4

5

Your experience

1

2

3

4

5

Past profit

1

2

3

4

5

Asset appreciation

1

2

3

4

5

For your weakest elements, what can you do to strengthen your point score?

Got a question about your business and taxes? Make sure you go to www.YouTube.com/USTaxAid to subscribe for your daily tax minute!

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In 2017, I became an Enrolled Agent(EA), considered one of America's Tax Experts. However, the one thing I learned becoming an EA is how much we don't know and being one of America's Tax Experts you have to constantly keep learning. I search everywhere for the best opportunities to learn more about business and real estate taxation. I wanted the most current and updated information so I can provide the best level of service to my clients. When I learned that Diane Kennedy had a twice a month coaching program that gives you the most updated information about the niche I service. This was a no-brainer! Twice a month I get access to one of America's top author and expert on business and real estate tax topics. If you are on the fence about signing up for coaching. You need to hop off and join!

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Thank you for your Saturday consult, Diane. It certainly cleared the muddiness in my decision re Sub S election. I learned more from you in 30 minutes than I learned from my past year with the big accounting firm that I use! I get vague answers to specific questions from them but I really felt your answers were focused, actionable, and specific. Thank you again.

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Wow, EXCELLENT coaching session! You packed a lot of "meat" into this 30-minute coaching call. I will be re-listening and re-reading the Home Study course numerous times for this topic. Thank you, Diane!

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I am absolutely floored by Diane Kennedy's breadth of experience when it comes to the entirely too complicated US tax code! She has reduced my businesses tax bill by MILES and has actually, somehow, gotten us a refund! For the record, our international business turns over $80 million annually! She is very responsive to all of my queries and is just an absolute pleasure to work with. I really don't know what we would do without her and her team. Thank you Diane and USTaxAid!!!

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Greg M, Camden, IN

I have initially heard Diane's name from the podcast series called "Lifetime Cashflow Through Real Estate Investing" offered by Rod Khleif. To say Diane offered a lot of valuable tips during the podcast is an understatement! She touched upon such important and valuable topics as cost segregation, things to look for in a property inspector, write off when filing income taxes, and etc. I then went ahead and jumped on Diane's website USTaxAid.com. After reviewing just a handful of Diane's articles, I have found myself emerged into reading up and following up further on such important topics for any investor as itemizing deductions, searching for big cash-flowing properties under the new administration and much much more. I'm really excited about finding Diane's site and making a good use of her blog posts and articles. I hope other real estate investors will benefit from it as well! Thank you Diane!

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